So much for public trust

It appears that when it comes to tax revenue, it is better to be feared than loved.

Improved faith in government was meant to improve the public’s willingness to pay the correct amount of taxes. That doesn’t seem to have happened.

The analysis of an economist on the tax collection effort of the Aquino administration over its first 10 months in office seems to have yielded a key finding: that relying on anti-corruption efforts to raise tax revenue was naive and illusory. Indeed the analysis showed that while tax revenues grew in response to an expanding economy, it fell as a proportion of it. In fact, despite the highly publicized legal cases of alleged tax cheats hitting the headlines during the period, the tax to GDP ratio actually declined in the second half of the year (the period under the present administration).

So it seems despite the astronomically high public approval rating enjoyed by the Benevolent One during most of this period, the public was not willing to pay his government its due. In fact, they were even more willing to pay a greater percentage of their income to the most distrusted administration since records of public trust were kept. As this reality began to dawn on the hapless economic managers of the current president, they announced that new taxes may be on the horizon.

True: the most benevolent one may have uttered the words, “no new taxes” during a campaign speech, but that was based apparently on the myth that an honest government would inspire reciprocal honesty from its citizenry in paying their taxes correctly. Having not lived up to their end of the bargain, the eunuchs in the Palace have found reason to renege on that campaign pledge made to the public. But not yet, at least not in this year. Perhaps in the next, 2012, a year before people go to the polls.

Such a timetable would appear to be political suicide for any congressman or senator up for re-election, but not for the politically tone deaf players in the Palace. It would seem strange for them to enunciate such a plan a year in advance. Is this their way of signalling to the public and the tax agents that this is their last chance to hold up their end of the deal? Well so it would seem. But what if the public calls their bluff?

This government doesn’t seem to be good at playing ‘the game’. It blinked in the run up to the LEDAC with the withdrawal of the RH Bill when the prelate began making noise. It could blink in the lead-up to the 2013 election campaign. It is a well-known fact that an election year is the worst time to conduct tax policy. The likelihood that perverse outcomes result is very high. It was back in 1997 when the government had finally posted a net surplus for the third year in a row that a major tax overhaul was churned through Congress. The result was a gradual erosion of revenues that have led to the current predicament: all because 1997 was a pre-election year.

What is worse is that the eunuchs announced that they intend to target the tobacco and liquor industries. Such hubris! The pockets of these merchants are deep. So deep they have resisted attempts, most recently in 2005 when economic and fiscal conditions were most bleak, to have taxes raised on them. The palace seems unwilling to go for the big ticket items like raising the VAT rate or taking out many of the exemptions introduced back in 1997.

Such a move would be truly unpopular given the rising food and energy prices of late, but it may be inevitable if the administration ever intends to make good on its other campaign pledges (it would cost roughly Php350 billion a year to close the budget gap and another Php150 billion to meet its Millennium Development Goal targets). Doing so would raise the tax to GDP ratio to around 18.5%, back to the same level it had reached in the mid-90s.

Perhaps for these economic managers, the most sensible thing they could do would be to delay new tax measures until after the mid-term elections of 2013. Having gained a fresh mandate, congress could then approach the tax system with greater freedom and flexibility. The important thing would be to prepare the tax proposals in the interim and connect them to the president’s social reform agenda.

That way, they could go to the election with the question, what kind of Philippines do we want? One that is fairer and more equitable, or one that is not. If we desire the former, then here is the price tag. Having exhausted all attempts to raise revenues, they could be warranted in posing that choice. In the final analysis, we should not just demand for the kind of government we want, we have to be willing to pay for it as well.

Update: the original piece incorrectly made mention of the mid-term elections being held in 2012 instead of 2013 which is what the current version contains.

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.

  • J_ag8

    This is for GabbyD..

    If at this late juncture one still does not know what crony capitalism means then obviously there is no need for discussion.

    Acquiring assets for oneself through political power is a criminal act. Whether the business succeeds or not is immaterial. Those who are well connected get away with paying less taxes or none at all through political connections. That is also crony capitalism…

    http://www.investopedia.com/terms/c/cronycapitalism.asp

    http://en.wikipedia.org/wiki/Crony_capitalism

    SMC’s total public float is close to 10%. That means that it is owned by a few large bloc owners of stocks.

    Anyone who contends that it is not crony capitalism if the company one steals makes money is utterly and totally clueless.

  • UP nn grad

    Valte, Carandang and lacierda should push for more media blitzes that highlight Noynoy plans for walang-corrupt walang mahirap theme. Highlighting stories and anecdotes may work and Malacanang may want to discourage Cielito Habito from publishing statistics that put Noynoy in a bad light.

    And then this — Maybe , in the end, the media blitzes about charges being filed against Lamborghini-dudes or even Mikey Arroyo may be scaring no one in particular. What can help — convictions. Convictions can put the bejeeesus fear into people, plus fines and penalties and being able to collect money for Pilipinas treasury — that should work.

  • J_ag8

    It is sad that most Pinoys still do not know the difference between country and the state. Tribes/clans in a country evolving into a state is a process that takes time.

    Lacking a sense of state wherein the requirements for the administrators of the state are under the control of an elite that prefers a weak dysfunctional state since their loyalties lie elsewhere.

    It is the elite that is responsible for the formation of a nation state to protect their interests.

    However in the Philippines the elite which is an offshoot of the colonial period do not see the need for an effective state. The present government like all previous governments use their positions simply to support and strengthen their own personal economic interests after they leave the government.

    The primary issue of state capture is exactly the primary aim of the elite.

    That is what is the defining characteristic of a feudal system.

    Political realities drive economic policy.. But political capture is the name of the game.

    In that vein PNoy is almost a complete imbecile.

    Slogans and speeches are good campaign tools. Elections are long gone.

    No one in the country seems to fight for the state’s interest. Everyone can be bought including PNoy.

    • manuelbuencamino

      Jag,

      Political capture still exists but it is on its way out. The richest man in the Philippines was a small businessman who worked his way up without using political connections. The man has shown the way. He has proven that one become successful from entrepreneurship and hard work, without the need to sell his soul to politicians. Many of today’s entrepreneurs are following his example.

      I think we will evolve out of regulatory capture. Of course, it will not happen as fast as we would like but it will happen because entrepreneurs have learned that regulatory capture is bad for business in the long run.

      As to everyone can be bought, you need to qualify that because no one can will accept money in exchange for his own destruction. Sa madaling salita, there is a price for everyone up to a certain point only.

      • J_ag8

        Point to one person or group of persons in the country who are steeped in the Republican tradition of State.

        The evolution of the idea of the State as a separate entity representing the republic.

        Rigoberto Tiglao came out with a good piece on the reason why Danding Conjuangco won his case regarding the shares he bought in San Miguel.

        He got Marcos to impose the levy and then had himself appointed private fund manager of the levy and then bought over a bank and had the bank lend him money to buy the shares. it appears that the Cory government never offered the loan documents to the courts to prove the insidious nature of that sweetheart deal.

        There is no outrage in this country since most people including unfortunately yourself understand how economic systems are perverted by those who control the political levers of power.

        The states responsibility lies in guaranteeing that private returns and social returns are the effects of economic policies that are inclusive. The fact that successive government including this one depend on a corrupt economic system that is the primary cause and the effect is endemic corruption in both private and public institutions.

        Using the power of the state to create assets is an embedded power based on future taxes. But this power is to be used for the common good under a Republic.

        Not for the private interests of a few that control the body politic.

        PNoy does not the gravitas to start to change this economic system in which his family and clan survive and prosper.

        • GabbyD

          jag, i’ve always been curious…

          if danding has repaid the loan from the bank (presumably including interest), what is the case for going after the shares themselves?

          after all, the money is paid back, and if danding made money off the loan, then thats a good thing.

          • J_ag8

            GabbyD, Let me use a present day analogy. The government owns numerous properties in Makati thru the GSIS. I ask PNoy to appoint me head of GSIS while he declares martial law. Political decisions cannot be questioned.

            I then ask the GSIS to lend me money so I can buy a prime property with the property itself being used as collateral. Think (RJ) during the Ramos time.

            I then leverage that asset for redevelopment and naturally the future value of that property with the incremental capital gain will redound to me after I pay the behest loan.

            Under martial law that is not a crime.

            If one would study the history of the American republic since its inception you would see that the State did enter into sweetheart deals with the private sector but that was directed into building the physical infrastructure of the then developing state.

            The railroad barons were given vast tracts of land as part of the incentive for them to build.

            Then President Lincoln even directed the establishment of the first integrated U.S. steel mill to
            that led to the rise of Andrew Carnegie.

            Look at the difference in economic policy. Building a railroad from buying the monopoly beer maker.

            Our landed elite is still backward and steeped in the tradition of the physiocrats.

            Look at the difference between the private /public partnerships in Singapore.

            The fund management of TEMASEK and GIC. These funds together built up the assets that made Singapore a first world city.

            What happened to the funds from the levy?

            Just look at the state of the creation of public goods in the country… Both human and physical.

            Business is one thing. Economic is totally another realm.

            I believe in the institution of private property but when property is gained through political power it is not private property under republican institutional frame.

            Under a feudal system where men rule it is perfectly legal.

            Kingdoms/Fiefdoms are not Republics.

            i personally do not see the Philippines as a republic and act accordingly… Buying power is the norm and is practical…

          • GabbyD

            “I believe in the institution of private property but when property is gained through political power it is not private property under republican institutional frame.”

            why not?

            isnt the issue this: was the loan used in profitably? was the loan paid back, PLUS the interest forgone?

            why does it matter how it gets distributed, as long as it creates wealth?

            as you yourself said, the rail barons of the US made these investments and they PAID OFF.

            isnt that the ultimate arbiter of whether an investment is a good thing?

            now, had danding lost money, and did not pay — IBANG USAPAN NA YAN.

            now thats what people usually decry as cronyism — when money is given into a SINKING INDUSTRY only because of political reasons.

            this is bad, and this i understand.

            but if danding created VALUE and paid back the loan, whats the problem?

    • UP nn grad

      Everyone to a point? Noynoy can’t be influenced by gifts of travel or cars or bank accounts, can he? Nor Mislang, nor Valte? Nor Robredo? And “… money can’t distract them from “daang matuwid”!” just an important criteria as loyalty that Noynoy uses to choose BIR chief and AFP Chief of Staff, true?

      I wonder if DepEd chief can be influenced by a personal letter from the Pope?

      • manuelbuencamino

        Most people. But you my friend must know some people who have a different threshold.

      • UP nn grad

        I think that most Pilipinos can not be bribed by gifts of vrooom-vroom-cars or bank accounts. I don’t know Conrado deQuiros. I don’t think ten million pesos or a 5-year PhD scholarship for his daughter will make him support Noynoy on Hacienda Luisita or on selling out on the Spratlys, too bad he is an incompetent to be a BIR-examiner or a charges-d’affaires much less an ambassador. I don’t know Ellen Tordesillas; too bad she is an incompetent for BIR examiner much less be able to separate facts from innuendos when it comes to Ping Lacson, Erap, Imelda Marcos or Gloria Arroyo.

        As for DepEd Chief, I believe that when the pressure is really put on him, that he will “twist the facts” to orient the way that Pilipinas 14-year-olds and younger are taught if he is pressed by the CBCP and especially by a special letter from the Vatican.

  • Bert

    Name-calling and speculations. What’s happening to you, Doy?

  • manuelbuencamino

    1. There is nothing voluntary about paying taxes. The BIR has to work harder.

    2. The non exclusion of the RH Bill as a priority measure was probably due to the Palace’s belief that some form of accommodation or compromise with the bishops could be reached. Recall that the Palace was drafting its own version of the bill. However the bishops took a hard-line position, closing the door to any dialogue whatsoever. So the president came out with his statement about excommunication.

    It seems that the Palace approach to the RH Bill and the clergy’s opposition to it was less about pleasing the bishops than it was avoiding bitter divisions among the public over the bill. The strategy seems to be working because the bishops’ behavior have been driving the public into near unanimous support of the bill.

    3. Taxes will be increased if there is a need for money and there is no other way to raise it. Any sensible administration will of course exhaust all options before taking the new taxes route.

    • The RH bill was included up until early January as part of the priority package of the administration. Then the situation changed in early February after a series of CBCP pronouncements and a meeting with a retired bishop in Malacanang. The RH bill was held in abeyance until further consensus could be built with the clergymen.

      You say that was a change in tactic that seems to have worked as the clergy feel they have won and are now over-reaching. Perhaps that might have been a consequence of dropping the bill, but I think it gives too much credit to the Palace insiders to say this was their intent all along. I would tend to think this was more of a fluke then success on their part and that is what scares me.

      • manuelbuencamino

        Doy,

        You read tactic into my comment. I was simply narrating how things panned out.

        The intent was and is always to avoid divisiveness in our society. The Palace was looking for a middle ground but the bishops took an all or nothing position. Consequently the president who had been for responsible parenthood as far back as the campaign drew the line: no to abortion, yes to artificial contraception. That seems to be the position shared by the majority and many religious groups as well.

        Where is the fluke there? Where is the success? The bill has not been passed. You are getting ahead of yourself.

        • You are right. You said “strategy” whereas I felt it was more of a tactic. We can quibble over this, but the results speak for themselves: if they had intended to moderate the debate and foster unity, then that strategy/tactic failed in that the two sides are as polarized as ever.

          I did qualify what I said in saying that “perhaps” the strategy might be working, but I was giving your argument the benefit of the doubt.

          True the RH bill might still be aborted. What is not clear to me is whether the Palace wants to abort it so that it can introduce its own RP bill or whether it wants to have the bill passed as it is. If the former, then it would be making the good the enemy of the perfect.

          • manuelbuencamino

            The intent was and is always to avoid divisiveness in our society.

            What can you do if one side refuses to budge?

            If Congress passes and RH Bill, the president will sign it. There is no intention to propose a bill that will kill the present bill. And there is no pretense to perfection.

    • On the taxes issue, exhausting all options might have appeared sensible, but the recent performance of the government is actually quite dismal. It invalidates the claims made during the campaign that clean government will lead to our finances being in better shape.

      The administration has to now base its decisions moving forward on evidence rather than platitudes. That evidence so far points to a change in policy, but on the other side of that coin are the political considerations.

      The other political contenders it seems were more prescient and forward looking during the campaign when they did not rule out the possibility of new taxes. That would have set the tone at least within the first six months for a level-headed assessment. Instead the first 36 months of this administration will be spent tinkering around the edges when fundamental reform is needed.

      • manuelbuencamino

        The claim that clean government will lead to better finances is not invalidated by figures on revenue collection. The administration has been able to eliminate the wastage in GOCCs, DPWH and other government agencies. Those amounts are not irrelevant. In addition the reforms lead towards a positive change in the attitude of government officials which will lead to plugging leakage. The premise behind the kung walang corrupt is that the leakage is so huge that plugging even a portion of it would save us from burdening the public with more taxes. What is wrong with that?

        Granted the government can do better with BIR and Customs. Because a government can and should always do better.

        I live here and I have friends who do major business with customs and BIR. I asked them if there were any palpable improvements. The answer is a qualified yes.

        Here’s what they said: Alvarez is trying his best but the corruption in Customs is very deep. He will not be able to stop it completely and he knows it. What he has done is to start with the big importers. We feel the changes now. It is the smaller importers who are still feeling the sting. That will take a long time to fix because customs has stage four cancer. The changes going all the way down will be incremental but start with the big ones and it will eventually filter down.

        I think the same applies to BIR. That’s what a large taxpayer told me. Kim Henares is honest and she is capable.

        The few big honest businessmen that I know are happy that the revenue agencies are working to create a level playing field. Tax and customs cheats will lose their edge.

        As to fundamental reforms on taxation, what do you want to see reformed?

        You see one argument against new taxes has always been stop the leakages and improve collection before you talk about new taxes. That is what the administration is trying to do. What is wrong with that?

        • With the greatest respect, MB, the cases that you cite are anecdotes. This however is contradicted by the data. The growth of revenues appears to come from economic growth rather than through anti-corruption efforts.

          Furthermore, what tax reformers will say is that the reason for the difficulties in tax administration is the fact that so many possible loopholes in the tax code exists.

          Reform the tax code by doing away with these loopholes and you make the lives of examiners and agents that much simpler. This minimizes the “transactions costs” that give rise to corruption in the first place.

          • manuelbuencamino

            Doy,

            your point : It invalidates the claims made during the campaign that clean government will lead to our finances being in better shape.

            I gave you my reply to that.

            As to, “The growth of revenues appears to come from economic growth rather than through anti-corruption efforts.”

            You have read about the slashing of GOCC bonuses, the review of billions in contracts with DPWH, the streamlining of procurement and bidding systems in AFP etc. The savings from these reforms do not show up as revenues but they are real.

            As to anecdotal evidence. I guess if they gave their names and cited figures they would become statistical evidence. The point of the anecdote is to share with you what real businessmen are actually saying – there see changes although these have not seeped down.

            And yes plugging tax loopholes, simplifying the system is good. Computerization will also help. Actually removing discretion from the equation is the goal. Henares and Alvarez are working on those. They could use the help of the private sector and policy analysts.

            You may want to share your proposals on this blog.

        • We need to distinguish expenses from revenues. The thesis of the ‘public trust effect’ assumes the citizens would be more willing to pay the correct taxes if they trusted or had faith in their government.

          It is two-sided in other words. You can control expenditures with or without the consent of the public. Collecting taxes however is a function of both the government and its citizens.

          That many good things are being pursued by this government is not in doubt. What is in doubt is whether the citizens will see this and be willing to be honest with their tax returns.

          The data so far detracts from the notion that public trust leads to better tax compliance. Well, I suppose if a loophole is legal, you cannot fault a taxpayer for availing of it. Which means that the problem is structural, an overhaul of the law, not the people is needed.

          No new taxes was not necessarily incompatible with removing exemptions on existing taxes. That I think was the distinction this administration failed to make at the onset. They could have done a lot of work in this area but chose to wait until their efforts bore fruit. Now that it seems this will take time, it’s on to ‘Plan B’.

          • manuelbuencamino

            The thesis of the ‘public trust effect’ assumes the citizens would be more willing to pay the correct taxes if they trusted or had faith in their government.

            That’s exactly what my anecdotal conversations told me – “I don’t mind paying taxes if the government is not corrupt.”

            The other welcome change as far as taxes are concerned is the requirement for everybody earning over P500K a year to file a statement of assets and liabilities. That will make it easier to go after tax cheats because it will follow the formula used to catch al capone and mikey arroyo.

            One last question: are you making a pitch for new taxes or better collection or both?

          • Your anecdotal evidence points to people’s intent to pay, but it doesn’t really prove that they fulfilled that intent in paying the right taxes.

            Intent is very different from actual behavior, and the stats confirm what the actuals were on aggregate. No doubt some may have paid more, but on aggregate, most didn’t. I think it’s worth making that distinction.

            As for what I am ‘pitching’. I think in fact some tax rates should go down in some areas like personal and corporate income taxes to enhance the incentives for work and investment, while they would have to go up in other areas (real property is one option, VAT another).

            So when you consider the tax mix, the conversation should be about reforming the tax system rather than an argument over new taxes vs improved collection efficiency.

          • manuelbuencamino

            I’d appreciate you sharing your ideas on tax reform.

            Pero I don’t like increased realty taxes and vat.

            There must be other areas you can tax.

            Kawawa naman yun mga OFWs with their first house and lots kung itataas mo ang realty tax. Besides that would be a disincentive for them to invest in housing and property.

            Kawawa din sila kung tataas ang vat kc it’s only now that they can afford to eat in restaurants and buy stuff that are not vat exempt i.e basic foods, etc. Let’s allow them to enjoy their new wealth before we tax them further.

            Bottomline: good policy and good politics must go hand in hand.

          • You will probably like Recto’s proposal for higher royalties on mining. Similar to sin taxes but not quite, although the revenue increase is quite small.

            That’s the problem with tax reform of this nature. It is highly unpopular, but pursuing the right policy means getting the timing right.

            Managing the politics means introducing tax reform at the right point in the political-budget cycle: at the height of one’s net approval rating, not at the trough.

            If our leaders don’t step up to the plate, our nation loses out in the end.

  • UP nn grad

    Doy: go to the campaign 2009-2010 and you will see bloggers who are one with Makati Business Club — opposition to income-tax increase on sales-tax increase or whatever tax increase. Noynoy is now in Malakanyang and his circle of advisers are now in Malakanyang — maybe the campaign contributors see the Noynoy win as license, result is “…the tax to GDP ratio actually declined in the second half of the year “.

    Pero ang bagsik mo naman… eunuchs… actually, that’s funny.

    Eunuchs. hah hah hah.

    Is it possible that the Noynoy Lacierda-Ochoa-Carandang creating hundreds of media-blitz hours on Truth Commission-1 (plus the minor distraction of UsecPuno and other personages and Quirino grandstand) also resulted in distraction to the governance of tax collections got affected? Maybe the distraction was contagious. “.When the cat is away, the mice will play” adage — paano ang next?